A stronger-than-expected August jobs report on Friday reinforced Dallas Federal Reserve President Robert Kaplan’s belief that there needs to be three to four interest rate hikes over the next 12 months to maintain steady economic growth.
“That tells me that over the next nine to 12 months, we ought to be raising the Fed fund rates probably at least three more times, maybe three to four times, to get to that neutral rate,” Kaplan said during an exclusive interview with FOX Business’ Edward Lawrence. “Everything that’s in this job report today just causes me to reaffirm that view.”
The U.S. economy added 201,000 jobs last month, and the unemployment stayed at 3.9 percent -- an 18-year low. Wages also increased in August, with annual wage growth moving to 2.9 percent from July's 2.7 percent. The wage number is consistent with a tight labor market, according to Kaplan, who welcomed the wage growth and said it was “probably consistent” with the Fed’s economic outlook.
“I’ve been saying that I believe, in light of economic performance, we ought to be moving toward neutral, a rate at which we’re neither simulative or restrictive at the Fed, because we’re at or near full employment -- or past it -- we’re meeting our 2 percent inflation goal,” Kaplan said.
Policymakers at the central bank have already voted to hike the benchmark federal funds rate twice this year, and are expected to do so twice more in 2018, bringing the yearly total to four. Officials previously indicated that three rate hikes would come this year. But in the face of a strengthening U.S. economy, investors have been watching closely to see whether the Fed would address any political developments – like a brewing trade war between the U.S. and its major economic allies.
Policymakers have indicated a looming trade war could be a wildcard for the economy. Although Kaplan agreed that headwinds from a tit-for-tat tariff battle have cooled some businesses -- more companies are taking a wait-and-see approach because of uncertainty surrounding trade -- he said that hasn’t actually affected the overall economy yet.
“Trade tensions, at this point, are just something I'm watching carefully but at this point, I don’t think it should change our plans at the Fed,” he said.
During an August interview with FOX Business, the head of the Kansas City Federal Reserve Esther George suggested that the $20 trillion U.S. economy would not be affected if trade tensions did not surpass the $50 billion in actual and announced tariffs on Chinese goods (and the tariffs on imports from other countries). But, she warned that uncertainty could stunt spending by businesses, and therefore slow economic growth.
The Fed’s next scheduled meeting is set for late September, when it’s expected to raise rates again and issue an outlook for proposed rate hikes over the next coming years.